Loading...
HomeMy WebLinkAboutPR 17769: CONTRACT FOR ARBITRAGE REBATE COMPLIANCE SERVICES WITH FIRST SOUTHWEST ASSET MANAGEMENT, INC. Memorandum City of Port Arthur, Texas Finance Department To: Floyd T. Johnson, City Manager From: Deborah Echols, Director of Finance - Date: July 2, 2013 Subject: Proposed Resolution 17769 BACKGROUND The City is obligated by bond ordinances to monitor the investment earnings of bond proceeds to determine to what extent, if any, we will be required to rebate excess earnings, "rebatable arbitrage ", to the Internal Revenue Service. Internal Revenue Code Section 148 (f) (2), and subsequent, constantly changing, Treasury Department regulations, set forth the statutory rules and exceptions used to calculate rebatable arbitrage. Compliance with these complex regulations requires specific expertise. Since 1995, the City has maintained a contract with First Southwest to provide arbitrage rebate services. Our relationship with First Southwest throughout the term of these contracts has been excellent. They have performed as outlined in the contract and assisted us in meeting the arbitrage exceptions. The contract also specifies fees for additional services as requested. These are specialized services, and most likely these services will not be required. BUDGETARY EFFECT Funding for these services is provided annually in the Finance Department budget account 001 -1031- 515.54 -00. P. R. NO. 17769 ASK 7/2/13 RESOLUTION NO. A RESOLUTION AUTHORIZING THE CITY MANAGER TO ENTER INTO A CONTRACT FOR ARBITRAGE REBATE COMPLIANCE SERVICES WITH FIRST SOUTHWEST ASSET MANAGEMENT, INC. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PORT ARTHUR: THAT the City Manager of the City of Port Arthur is hereby authorized and directed to execute on behalf of the City of Port Arthur a contract for arbitrage rebate compliance services between the City of Port Arthur and First Southwest Asset Management, Inc., in accordance with the attached agreement described in Exhibit "A "; and THAT, even though the contract is for two years, it is still subject to the availability and approval of funding during the annual budget approval process. THAT, a copy of said contract is attached hereto and made a part hereof as Exhibit "A "; and THAT, a copy of the action of this Resolution be spread upon the Minutes of the City Council. READ, ADOPTED, AND APPROVED, this day of July, 2013 AD, at a Regular /Meeting of the City Council of the City of Port Arthur, Texas by the following vote: AYES: Mayor: Councilmembers: NOES: Mayor ATTEST: Sherri Bellard — City Secretary APPROVED AS TO FORM: Val Tizeno, City At4 ey APPROVED FOR ADMINISTRATION: Floyd T. Johnson, City Manager Deborah Echols, Director of Finance Exhibit "A" 1 1 Form No. 148(f); Rev'd 1/10/03 AGREEMENT FOR ARBITRAGE REBATE COMPLIANCE SERVICES I3ETW EEN CITY OF PORT ARTHUR, TEXAS (Hereinafter Referred to as the "Issuer ") AND FIRST SOUTHWEST ASSET MANAGEMENT, INC. (Hereinafter Referred to as "First Southwest ") It is understood and agreed that the Issuer, in connection with the sale and delivery of certain. bonds, notes, certificates, or other tax- exempt obligations (the "Obligations "), will have the need to determine to what extent, if any, it will be required to rebate certain investment earnings (the amount of such rebate being referred to herein as the `Arbitrage Amount') from the proceeds of the Obligations to the United States of America pursuant to the provisions of Section 148(t)(2) of the Internal Revenue Code of 1986, as amended (the "Code "). For purposes of this Agreement, the term "Arbitrage Amount" includes payments made under the election to pay penalty in lieu of rebate for a qualified construction issue under Section 148(0(4) of the Code. We are pleased to submit the following proposal for consideration; and if the proposal is accepted by the Issuer, it shall become the agreement (the "Agreement ") between the .Issuer and First Southwest effective at the date of its acceptance as provided for herein below. 1. This Agreement shall apply to all issues of tax- ex.ennpt Obligations delivered subsequent to the effective date of the rebate requirements under the Code, except for (1) issues which qualify for exceptions to the rebate requirements in accordance with Section 148 of the Code and related Treasury regulations, or (ii) issues excluded by the Issuer in writing in accordance with the further provisions hereof, (iii) new issues effected in a fashion whereby First Southwest is unaware of the existence of such issue, (iv) issues in which, for reasons outside the control of First Southwest, First Southwest is unable to procure the necessary information required to perform such services. Covenants of First Southwest 2, We agree to provide our professional services in determining the Arbitrage Amount with regard to the Obligations. The Issuer will assume and pay the fee of First Southwest as such fee is set out in Appendix A attached hereto. First Southwest shall not be responsible for any extraordinary expenses incurred on behalf of Issuer in connection with providing such professional services, including any costs incident to litigation, mandamus action, test case or other similar legal actions. 3. We agree to perform the following duties in connection with providing arbitrage rebate compliance services: a. To cooperate fully with the Issuer in reviewing the schedule of investments made by the Issuer with (i) proceeds from the Obligations, and (ii) proceeds of other funds of the Issuer which, under Treasury Regulations Section 1.148, or any successor regulations thereto, are subject to the rebate requirements of the Code: b. To perform, or cause to be performed, consistent with the Code and the regulations promulgated thereunder, calculations to determine the Arbitrage Amount under Section 148(0(2) of the Code; and c. To provide a report to the Issuer specifying the Arbitrage Amount based upon the investment schedule, the calculations of bond yield and investment yield, and other information deemed relevant by First Southwest. in undertaking to provide the services set forth in paragraph 2 and this paragraph 3, First Southwest does not assume any responsibility for any record retention requirements Which the issuer may have under the Code or other applicable laws, it being understood that the Issuer shall remain responsible for compliance with any such record retention requirements. 72425 -1 Covenants of the issuer 4. lri connection with the - performance of the aforesaid duties, the issuer agrees to the following: a. The fees due to First Southwest in providing arbitrage rebate compliance services shall be calculated in accordance with Appendix A attached hereto. The fees will be payable upon delivery of the report prepared by First Southwest for each issue of Obligations during the tern of this Agreement. b. "I issuer will provide First Southwest all .information regarding the issuance of the Obligations and the investment of the proceeds therefrom, and any other information necessary in connection with calculating the Arbitrage Amount. First Southwest will rely on the information supplied by the Issuer without inquiry, it being understood that :First Southwest will not conduct an audit or take any other steps to verify the accuracy or authenticity of the .information provided by the Issuer. c. The Issuer will notify First Southwest in writing of the retirement, prior to the scheduled maturity, of any Obligations included under the scope of this Agreement within 30 days of such retirement. This notification is required to provide sufficient time to comply with Treasury Regulations Section 1.1.48 -3(g) which. requires final payment of any Arbitrage Amount within 60 days of the final retirement of the Obligations. In the event the issuer fails to notify .First Southwest in a timely manner as provided hereinabove, First Southwest shall have no further obligation or responsibility to provide any services under this Agreement with respect to such retired Obligations. 5. In providing the services set forth in this Agreement, it is agreed that First Southwest shall not incur any liability for any error of judgment made in good faith by a responsible officer or officers thereof and, except to the limited extent set forth in this paragraph, shall not incur any liability for any other errors or omissions, unless it shall be proved that. such error or omission was a result of the gross negligence or willful misconduct of said officer or officers. In the event a payment is assessed by the - internal Revenue Service due to an error by First Southwest, the Issuer will be responsible for paying the correct Arbitrage Amount and First Southwest's liability shall not exceed the amount of any penalty or interest imposed on the Arbitrage Amount as a result of such error. Obligations Issued Subsequent to initial Contract 6. The services contracted for under this Agreement will automatically extend to any additional Obligations (including financing lease obligations) issued during the tern of this Agreement, if such Obligations are subject to the rebate requirements under Section 148(0(2) of the Code. In connection with the issuance of additional Obligations, the Issuer agrees to the following: a. The Issuer will notify or cause the notification, in writing, to First Southwest of any tax- exempt financing (including financing lease obligations) issued by the issuer during any cale.ndar year ofthis Agreement, and will provide First Southwest with such information regarding such Obligations as First Southwest may request in connection with its performance of the arbitrage rebate services contracted for hereunder. If such notice is not provided to First Southwest with regard to a particular issue, First Southwest shall have no obligation to provide any. services hereunder with respect to such issue. b. At the option of the Issuer, any additional Obligations to be issued subsequent to the execution of this Agreement may be excluded from the services provided for herein, In order to exclude an issue, the Issuer must notify First Southwest in writing of their intent to exclude any specific Obligations from the scope of this Agreement, which exclusion shall be permanent for the full life of the Obligations; and after receipt of such notice, First Southwest shall have no obligation to provide any services under this Agreement with respect to such excluded Obligations. 72425 -1 Effective Date of Agreement 7. This Agreement shall become effective at the date of acceptance by the Issuer as set out herein below and remain in effect thereafter for a period of two (2) years from the date of acceptance, provided, however, that this Agreement may be terminated with or without cause by the .issuer or First Southwest upon thirty (30) days prior written notice to the other party. In the event of such termination, it is understood and agreed that only the amounts due to First Southwest for services provided and extraordinary expenses incurred to and including the date of termination will be due and payable. No penalty will be assessed for termination of this Agreement. In the event this Agreement is terminated prior to the completion of its stated terns, all records provided to First Southwest with respect to the investment of monies by the Issuer shall be returned to the Issuer as soon as practicable following written request by Issuer. In addition, the parties hereto agree that, upon termination of this Agreement, First Southwest shall have no continuing obligation to the Issuer regarding any arbitrage rebate related services contemplated herein, regardless of whether such services have previously been undertaken, completed or performed. Acceptance of Agreement 8. This Agreement is submitted in duplicate originals. When accepted by the Issuer in accordance with the terms hereof, it, together with Appendix A attached hereto, will constitute the entire Agreement between the Issuer and First Southwest for the purposes and the consideration herein specified. In order for this Agreement to become effective, it must be accepted by the Issuer within sixty (60) days of the date appearing below the signature of First Southwest's authorized representative hereon. After the expiration of such 60 -day period, acceptance by the Issuer shall only become effective upon delivery of written acknowledgement and reaffirmation by First Southwest that the terms and conditions set forth in this Agreement remain acceptable to First Southwest. Governing Law 9. This Agreement will be governed by and construed in accordance with the laws of the State of Texas, without regard to its principles of conflicts of laws. Acceptance will be indicated on both copies and the return of one executed copy to First Southwest. Respectfully submitted, FIRST SOUTHWEST ASSET MANAGEMENT, INC. By o• 4/1" t Hill A. Feinberg, Chairman & Chief - cutive Officer Date ISSUER'S ACCEPTANCE CLAUSE The above and foregoing is hereby in all things accepted and approved by , on this the day of By Authorized Representative Title Printed Name 72425 -r APPENDIX A - FEES The Obligations to be covered initially under this contract include all issues of tax - exempt obligations delivered subsequent to the effective dates of the rebate requirements, under the Code, except as set forth in Section I of the Agreement. The fee for any Obligations under this contract shall only be payable if a computation is required under Section 148(0(2) of the Code. In the event that any of the Obligations fall within an exclusion to the computation requirement as defined by Section 148 of the Code or related regulations and no calculations were required by First Southwest to make that determination, no fee will be charged for such issue. For example, certain obligations are excluded from the rebate computation requirement if the proceeds are spent within specific time periods. In the event a particular issue of Obligations fulfills the exclusion requirements of the Code or related regulations, the specified fee will be waived by First Southwest if no calculations were required to make the deterrninatio.n. First Southwest's fee for arbitrage rebate services is based upon a fixed annual fee per issue. The annual fee is charged based upon the nu.rnber of years that: proceeds exist subject to rebate from the delivery date of the issue to the computation date. .First Southwest's fees are payable upon delivery of the report. The first report will be made following one year from the date of delivery of the Obligations and on each computation date thereafter during the term of the Agreement. The fees for computations of the Arbitrage Amount which encompass more, or less, than one Computation Year shall be prorated to reflect the longer, or shorter, period of work performed during that period. The fee for each of the Obligations included in this contract shall be based on the table below. Additionally, due to significant time saving efficiencies realized when investment information is submitted in an electronic format, First Southwest passes the savings to its clients by offering a 1.0° %0 reduction in its fees if information is proi'ided in a spreadsheet or electronic text file format. Description Annual Fee ANNUAL FEE 51,400 COMPREHENSIVE ARBITRAGE COMPLl4NCE SERVICES INCLUDE: • Commingled Funds Analysis & Calculations • Spending Exception Analysis & Calculations • Yield Restriction Analysis & Calculations (for yield restricted Project Funds, Reserve Funds, Escrow Funds, etc.) • Parity Reserve Fund Allocations • Transferred Proceeds Calculations • Universal Cap Calculations • Debt Service Fund Calculations (including earnings test when required) INCLUDED • Preparation of all Required IRS Paperwork for Making a Rebate Payment / Yield Reduction Payment • Retention of Records Provided for Arbitrage Computations • IRS Audit Assistance • Delivery of Rebate Calculations Each Year That Meets the Timing Requirements of the Audit Schedule • On -Site Meetings, as Appropriate, to Discuss Calculation Results % Subsequent Planning Items OTHER SERVICES AVAILABLE: iRS Refund Request — Update calculation, prepare refund request package, and assist issuer as necessary 5750 in responding to subsequent IRS Information Requests Commercial Pa' er Calculations — Per allocated issue 51,600 72425 -1 EXPLANATION OF TERMS: a. Computation Year: A "Computation Year" represents a one year period from the delivery date of the issue to the date that is one calendar year after the delivery date, and each subsequent one -year period thereafter. Therefore, if a calculation is required that covers more than one "computation year," the annual fee is multiplied by the number of computation years contained in the calculation being performed. If a calculation includes a portion of a computation year, i.e., if the calculation includes I V2 computation years, then the base fee will be multiplied by 1.5. b. Electronic Data Submission: The data should be provided electronically in MS Excel or ASCII text file (comma delimited text preferred) with the date, description, dollar amount, and an activity code (if not in debit and credit format) on the same line in the file. c. Variable/.Floating Rate Bond Issues: Special services are also required to perform. the arbitrage rebate calculations for variable rate bonds. A bond is a variable rate band if the interest rate paid on the bond is dependent upon an index which is subject to changes subsequent to the issuance of the bonds. The computational requirements of a variable rate issue are snore complex than those of a fixed rate issue and, accordingly, require significantly more. time to calculate, The additional complexity is primarily related to the computatio.n of the bond yield, which :must be calculated on a `bond year" basis. Additionally, the regulations provide certain flexibility in computing the bond. yield and determining the arbitrage amount over the first .IRS reporting period; consequently, increased calculations are required to determine which bond yield calculation produces the lowest arbitrage amount. d. Commingled Fund Allocations: By definition, a commingled fund is one that contains either proceeds of more than one bond issue or proceeds of a bond issue and non -bond proceeds (i.e., revenues) of $25,000 or more. The arbitrage regulations, while permitting the commingling of finds, require that the proceeds of the bond issue(s) be "carved out" for purposes of determining the arbitrage amount. Additionally, interest earnings roust be allocated to the portion of the commingled fund that represents proceeds of the issue(s) in question. Permitted "safe- harbor" methods (that is, methods that are outlined in the arbitrage regulations and, accordingly, cannot be questioned by the IRS under audit), exist for allocating expenditures and interest earnings to issues in a commingled fund. First Southwest uses one of the applicable safe- harbor methods when doing these calculations. e. Debt Service Reserve Funds: The authorizing, documents for many revenue bond issues require that a separate fund be established (the "Reserve Fund ") into which either bond proceeds or revenues are deposited in an amount equal to some designated, level, such as average annual debt service on all parity bonds. This Reserve Fund is established for the benefit of the bondholders as additional security for . payment on the debt. In most cases. the balance in the Reserve Fund remains stable throughout the life of the bond issue. Reserve Funds, whether funded with. bond proceeds or revenues, roust be included in all rebate calculations. f. Debt Service Fund Calculations: Issuers are required under the regulations to analyze the invested balances in their debt service funds annually to determine whether the fund depletes as required during the year and is, therefore, "bona fide" (i.e., potentially exempt from rebate in that year). it is not uncommon for surplus balances to develop in the debt service fund that services an issuer's tax supported debt, particularly due to timing differences of when the funds were due to be collected versus when the funds were actually collected. First Southwest performs this formal analysis of the debt service fund and, should it be determined that a surplus balance exists in the fund during a given. year, allocates the surplus balance among the various issues serviced by the fund in a manner that is acceptable under IRS review. g. Earnings Test for Debt Service Funds: Certain types of bond issues require an additional level of analysis for the debt service fund, even if the fund depletes as required under the regulations and is "bona fide." For short- terra, fixed rate issues, private activity issues, and variable rate issues, the regulations require that an "earnings test" be performed. on a bona fide debt service fund to determine if the interest earnings reached $100,000 during the year. In cases where the earnings reach or exceed the $100,000 threshold, the entire fund (not just the surplus or residual portion) is subject to rebate. h. Transferred Proceeds Calculations: When a bond issue is refinanced (refunded) by another issue, special services relating to "transferred proceeds" calculations :may need to be performed. Under the regulations, when proceeds of a refunding issue are used to retire principal of a prior issue, a pro -rata portion of the unspent proceeds of the prior issue becomes subject to rebate and/or yield restriction as transferred proceeds of the refunding issue. The refunding issue essentially "adopts" the unspent proceeds of the prior issue for purposes of the arbitrage calculations. These 72425-1 calculations are required under the regulations to ensure that issuers continue to exercise due diligence to complete the projects) for which the prior bonds were issued. i. Universal. Cap: Current regulations provide an overall limitation on the amount of gross proceeds allocable to an issue. Simply stated, the value of investments allocated to - an issue cannot exceed the value of all outstanding bonds of the issue. For example, this situation can occur if an issuer encounters significant construction delays or enters into litigation with a contractor. It may take months or even years to resolve the problems and begin or resume spending the bond proceeds; however, during this time the debt service payments are still being paid, including any scheduled principal payments. Thus, it's possible for the value of the investments purchased with bond proceeds to exceed the value of the bonds outstanding, in sueh cases, a "de- allocation" of proceeds may be :required to comply with the limitation rules outlined in the regulations. j. Yield Restriction Analysis/Yield Reduction Computations: The IRS strongly encourages issuers to spend the proceeds of each bond issue as quickly as possible to achieve the governmental purpose for which the bonds were issued. Certain types of proceeds can qualify for a "temporary period." during which time the proceeds may be invested at a yield higher than the yield on the bonds without jeopardizing the tax - exempt status of the issue. The most common temporary period is the three -year temporary period for capital project proceeds. After the end of the temporary period, the proceeds must be yield restricted or the issuer must remit the appropriate yield reduction. payment when due. First Southwest performs a comprehensive yield restriction analysis when appropriate for all issues having proceeds remaining at the end of the applicable temporary period. and also calculates. the amount of the yield reduction payment due to the IRS. 72425 -t